The sheer volume of financial transactions, along with the large number of contracts, contractors, vendors and customers, make governments prime targets for corruption, Bid Rigging and kickbacks.
- Public corruption is a form of dishonesty that involves one or more of the following: Bribery, conflicts of interest, extortion, or illegal gratuities. Public officials often manage large amounts of money. The temptation to enrich oneself at the expense of the public may be limited, but not eliminated.
- Bid Rigging is a form of collusion by which a vendor, generally with the help of a dishonest employee, illegally obtains a contract that was supposed to involve competitive bidding.
- A kickback is a type of fraud perpetrated by an employee and the employer’s vendor. Frequently a kickback involves the employee buying goods or services from the vendor at an overstated price. The vendor then pays the employee a part of the excess profit in the form of a kickback. Alternatively, a government customer may be given an artificially low price. The customer then gives the government employee part of the incurred savings.
By nature, this type of fraud can be very difficult to detect and, once detected, difficult to prove. These fraud types generally reveal themselves, not from an examination of individual transactions, but from an analysis of the overall patterns behind those transactions.
Bribery
Routinely late and overdue processing of paperwork (excessive lags: stamping the receipt of invoice and checking order received).
Extending or modifying receivable due dates or terms without making necessary disclosures or recognizing an appropriate valuation loss.
Involvement of an unnecessary middleman or broker.
A contracting employee declines a promotion to a non-procurement position.
A contracting employee insists contractors use a certain subcontractor or broker.
A contracting employee shows a keen interest in the award of a contract or purchase order to a particular contractor or vendor.
A contract change order lacks sufficient justification.
Other inspectors at the job site notice a pattern of preferential contractor treatment.
Awareness training.
See the Vendor Debarment page.
Cross-training.
Management oversight.
Make sure awards are decided by committee.
Have an approval process in place that validates every change order request.
Corruption/Bid Rigging/Kickbacks
Apparent connections between bidders: common addresses, personnel, or telephone numbers.
Different contractors make identical errors on bids.
Losing bidders hired as subcontractors.
Joint venture bids by firms that usually bid alone.
Losing bids do not comply with bid specifications or only one bid is complete and other bids are poorly prepared.
Tailored specifications (e.g., specific or restrictive requirements in files which seems to restrict eligibility).
Unusual bid patterns: too close, too high, round numbers, or identical winning margins or percentages.
Apparent connections between employees and vendors. Common: addresses phone numbers, Tax IDs, ownership interest.
Consistent preferential (early) payments to one vendor.
Look for invoices which do not have the folds that come from having been mailed. No folds, may point to potential fraud.
Sequential invoice numbers from the same vendor or invoice numbers with an alpha suffix.
Payments made on copies of invoices, not originals.
Vendor invoices are received by department other than accounts payable (purchasing).
Adequate vendor pre-screening
Federal Sites:
- Excluded Parties List System(replaced by System for Award Management (SAM))
(Contains parties that are excluded from receiving Federal contracts, certain subcontracts, and certain Federal financial and non-financial assistance and benefits)
Check state debarred vendor lists. Also see theVendor Debarment page.
Do not allow sole-source bid/awards.
Adequate vendor screening.
Data analytics.
Formal procurement process.
Separate check writing and checking account reconciliation. Never have the person who writes the checks also be the person who reconciles the checking account, this is asking for trouble.
Tax ID numbers on the vendor invoice should help you be more comfortable that the invoice is legitimate.
Segregate duties between processing of accounts payable invoices and updates to vendor master files.
General Guidance
As any entity involved in acquiring large amounts of goods and services, governments must, from time to time, contend with those who put their needs before those of the organization. Corruption, bid rigging and kickbacks, individually and collectively, result in higher costs to the purchaser. In the case of governments, the ultimate purchasers are the citizens. Below are red flags that can help identify corruption, bid rigging and kickbacks; to the right is a link to a publication discussing public corruption.
